What should be reduced to optimize the capital structure?

Optimizing the capital structure should reduce the overall cost of capital.

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The optimal capital structure refers to the lowest weighted average capital cost WACC of the capital raised by the enterprise within a certain period of time, so as to maximize the value of the enterprise.

1. Development of capital structure theory

Capital structure refers to the composition and ratio relationship of various long-term financing sources of an enterprise. Typically, a company's capital structure consists of long-term debt capital and equity capital.

Capital structure theory is to study the impact and role of liabilities on corporate value under certain conditions, and what kind of asset-liability ratio can maximize corporate value. From a development perspective, capital structure theory has gone through two stages: the "early capital structure theory" and the "modern capital structure theory" stages.

(1) Early capital structure theory

Early capital structure theory generally lacked solid theoretical foundation support and was eliminated with the development of modern financial theory, but the basic idea is still We understand the basics of capital structure theory.

Mainly include: net income theory, operating income theory, and traditional theory. Although the early capital equalization theory provided a certain description of the relationship between capital structure and company value and capital cost, this relationship was not abstracted into a simple model.

(2) Modern capital structure theory

The development of modern capital structure theory is marked by MM theory. In 1958, two American professors, Madigliani and Miller, jointly published a paper "Capital Cost, Corporate Finance and Investment Theory", which proposed the theory of capital structure irrelevance, which formed the basis of modern theory. The basis of capital structure theory.

Modern capital structure theory includes: MM theory without tax, MM theory with tax and trade-off theory.

The trade-off theory believes that an enterprise has an optimal capital structure. However, since financial crisis costs and agency costs are difficult to accurately estimate, the optimal capital structure cannot be obtained by calculation and purely theoretical analysis. Theoretically, the optimal capital structure is the capital structure that minimizes the enterprise's weighted average cost of capital and maximizes the enterprise value.

In fact, the determination of the optimal capital structure also requires judgment and selection through various factors that affect the capital structure in addition to corporate value and capital cost.